“Since the beginning of 2016, banks have sharply underperformed in both Europe and the US on renewed fears over the sector,” Benjamin Melman, head of asset allocation and sovereign debt, wrote in a recent research note.
“This contaminated bond markets, triggering a significant widening in senior and subordinated financial debt spreads.”
But Melman sees no signs of liquidity risk and no danger of systemic insolvency, as banks have strengthened capital reserves in line with regulatory requirements.
European banks, however, are still facing challenges. The European Central Bank indicated that they may take action in favour of banks in early March to alleviate investor concerns over bank profitability.
Melman said negative interest rates in the Eurozone and in Sweden, Denmark and Switzerland, are squeezing bank profits.
“Pressure on net banking margins was in evidence throughout the fourth quarter earnings season and led to substantial downgrades to earnings estimates which in turn fuelled further drops in share prices.”
Moreover, the prevailing climate of suspicion has turned banks into high market beta status, despite the sector’s robust fundamentals, he said.
“The reaction of UK banks to a possible Brexit is symptomatic. Nobody knows the exact consequences Brexit would have, but they would clearly be negative for Europe as whole,” he said.
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Europe’s banks are out of favour. The FTSE E300 Bank index has fallen much further than the funds in the Europe (with UK) equities sector over the past 12 months.
